The Price of Higher Order Catastrophe Insurance: The Case of VIX Options-Peking University HSBC Business School(PHBS)

The Price of Higher Order Catastrophe Insurance: The Case of VIX Options

by Bjorn Eraker*, Aoxiang Yang

ARTICLE | Journal of Finance | Vol.77, 2022

Abstract

We develop a tractable equilibrium pricing model to explain observed characteristics in equity returns, VIX futures, S&P 500 options, and VIX options data based on affine jump-diffusive state dynamics and representative agents endowed with Duffie-Epstein recursive preferences. Our calibrated model replicates consumption, dividends, and asset market data, including VIX futures returns, the average implied volatilities in SPX and VIX options, and first- and higher-order moments of VIX options returns. We document a time variation in the shape of VIX-option-implied volatility and a time-varying hedging relationship between VIX and SPX options that our model both captures.

LINKS

PKU PKUSZ PHBS中文 UK campus SIQEF.PKU RMI.NUS Job.opening

CONTACT US

Peking University HSBC Business School(PHBS), University Town, Nanshan District Shenzhen 518055, P.R.China

0755-26031383

int.admission@phbs.pku.edu.cn

LINKS

CONTACT US

3D CAMPUS